Banking products and services - Concepts - Chapter 1 Class 8 Economics - Introduction to Banks - Economics

Banking products and services 

Banks offer various products and services to their customers to meet their financial needs and preferences. Some examples are:   

• Savings account : A savings account is a deposit account that allows customers to save money and earn interest on it. It usually has a low minimum balance requirement and allows limited withdrawals per month.
  
  
• Current account : A current account is a deposit account that allows customers to make frequent transactions without any restrictions. It usually has a high minimum balance requirement and does not pay any interest.
  
  
• Fixed deposit : A fixed deposit is a deposit account that allows customers to deposit a lump sum amount of money for a fixed period of time and earn a higher rate of interest than a savings account. It usually has a penalty for premature withdrawal.
  
  
• Recurring deposit : A recurring deposit is a deposit account that allows customers to deposit a fixed amount of money every month for a fixed period of time and earn interest on it. It helps customers to save regularly and accumulate a large sum at maturity.
  
  
• Personal loan : A personal loan is a loan that customers can take for any personal purpose, such as medical expenses, wedding expenses, travel expenses, etc. It usually has a high rate of interest and requires minimal documentation.
  
  
• Home loan : A home loan is a loan that customers can take to buy or construct a house or property. It usually has a low rate of interest and requires collateral security.
  
  
• Car loan : A car loan is a loan that customers can take to buy a car or vehicle. It usually has a moderate rate of interest and requires the car as collateral security.
  
  
• Education loan : An education loan is a loan that customers can take to pursue higher education in India or abroad. It usually has a low rate of interest and requires the student’s academic performance as collateral security.
  
  
• Business loan : A business loan is a loan that customers can take to start or expand their business activities. It usually has a variable rate of interest and requires the business plan and financial statements as collateral security.

How banks make money 

Imagine you need to borrow money from a bank, or you want to save your money in a bank. Here's how banks make money in a simple way:

• Borrowing Money - Paying Interest
  If you borrow money from a bank, they will lend you the amount you need. But, they will ask you to pay back a little extra money on top of what you borrowed. This extra money is called "interest."
  For example, if you borrow ₹10,000 from a bank for one year, and the interest rate is 10%, you will have to pay back ₹11,000 at the end of the year. The bank earns ₹1,000 from lending you the money.
  
  
• Saving Money - Earning Interest
  Now, let's say you have some money and want to keep it safe in a bank. The bank will be happy to keep your money safe and will even give you a little extra money as a "thank you" for saving with them. This "thank you" money is also called "interest."
  For instance, if you deposit ₹10,000 in a bank for one year, and the interest rate is 1%, you will get back ₹10,100 at the end of the year. The bank pays you ₹100 for saving your money with them.

• The Bank's Money-Making Trick
  Here's how banks make their money: They charge borrowers a bit more in interest than they pay to savers. The difference between the interest earned on loans and the interest paid on deposits is like their "net interest income." The higher the margin, the more money the bank makes.
  For example, if a bank lends ₹100,000 at 10% interest and pays ₹90,000 at 1% interest, its money-making trick (net interest income) is ₹9,000 (₹10,000 - ₹900).

So, that's how banks earn money by playing the "interest game" with borrowers and savers, making it possible for people to borrow and save money conveniently. 

How Banks Get Money from RBI

Sometimes, banks may run out of money to lend to people or to pay back those who saved with them. When this happens, they need help, and that's where the RBI comes in!

• The RBI - The Bank of Banks
  The RBI is like a special bank that watches over all other banks in India. It's the boss of the banking system and takes care of the country's money.
  
  
• When Banks Need Help
  Sometimes, banks may face challenges, like many people withdrawing money all at once or facing losses from bad loans. When this happens, they might not have enough money left to keep things running smoothly.
  
  
• Borrowing from RBI - The Repo Rate In such situations, banks can borrow money from the RBI to fill the gap. The RBI lends money to banks at a certain interest rate, called the "repo rate." This rate is like a fee the bank pays for borrowing from the RBI.
  
  
• How RBI Influences the Economy
  The RBI uses this repo rate to influence the economy. If the RBI wants more spending and growth, it can reduce the repo rate, making it cheaper for banks to borrow and lend to people. This encourages people to spend and invest more, boosting the economy.
  
  
• Reserve Requirement - CRR
  The RBI also asks banks to keep some of their money with it as a reserve. This is called the "cash reserve ratio" (CRR). It helps the RBI control the money supply and ensures banks have enough cash to meet their obligations.
  
  
• How CRR Works
  For example, if a bank receives ₹100 in deposits and the CRR is 4%, it must keep ₹4 with the RBI. This leaves the bank with ₹96 to lend to people. CRR also affects how much money banks can create and lend.

So, when banks need extra money to keep things going, they can turn to the RBI for help. The RBI acts like a reliable friend, making sure the banking system stays strong and the economy keeps running smoothly!